What’s the rate tipping point to stop investors?

What’s the rate tipping point to stop investors?

With the RBA rate maintaining at its historic low of 1.5 per cent, it’s likely we won’t see a rate change in the next 12 months. However, when we do see an increase, how high will rates need to go to stop investors?

According to RiskWise Property Review founder Doron Peleg, the current cash rate has facilitated current property investors over the last five years.

“The share of property investors has significantly increased during the past five years and have had a major impact on the increased dwelling prices in our major capital cities,” Mr Peleg said.

If there are any cash rate increases, Mr Peleg said large numbers of property investors could pull out of the market.

RiskWise and Mr Peleg have looked at gross rental returns, and the amount required to service a discounted variable loan, based on an 80 per cent LVR, to create the Surplus/Shortfall Ratio (SSR), to determine how high rates need to go in order for investor activity to decline.

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The research also assessed the correlation between the SSR and the rate of investors in the market as a percentage of all property buyers to see changes in median dwelling prices, as well as the estimated SSR equilibrium points for property prices to increase, decrease and remain unchanged.

RiskWise’s research determined a link between the SSR and the number of investors currently in the market, with Mr Peleg saying that the higher the ratio, the larger number of investors in the market.

The research was focused on Sydney, Melbourne and Brisbane, as RiskWise Property Review determined these states were the only markets with strong investor activity that could shape the whole market.

Equilibrium points were identified to show how high and how low interest rates have to be in order to push investors out of the market. The levels were chosen, according to Mr Peleg, because high interest rates cause higher out-of-pocket expenses due to believing in the chance for higher rents or a falling interest rate, and low interest rates create a cautious atmosphere and struggle with justifying higher rents.

In order to reach the equilibrium points and push investors out of the market, Mr Peleg says at a change of 0.5 per cent, investors in NSW would be impacted.

“While NSW has enjoyed a very strong capital growth, the SSR ratio is relatively low.

“However, the impact on different areas in NSW is projected to be different: units in the outer suburbs are projected to be more impacted than units in well established areas,” Mr Peleg said.

Meanwhile, a change of 1 per cent is predicted to impact investors in Victoria.

“Due to a very large number of units in the pipeline and a larger number of ‘Danger Zones’, the impact is projected to be greatly varied across the state,” said Mr Peleg.

“Units in the ‘Danger Zones’ are projected to be greatly impacted even by a couple of interest rate changes. However, houses in the inner and middle rings of Melbourne are projected to enjoy strong demand, as investors are more aware to the low risk and high capital growth that these properties deliver.”

Queensland, by comparison, has the largest margin to deal with interest rates, with a predicted change of 1.5 per cent.

“The pattern of the impact on units in inner Brisbane is projected to be very significant, while the impact on houses in well-established areas will only be limited.”